Pig and poultry farms increased output, production of cheese and butter has also gone up, there’s a lot of growth potential in the vegetables sector, farms are having a renaissance: Russia’s agricultural sector has not only managed to weather out the crisis and the embargo but has actually gained from the current economic situation.
"The agricultural sector is one of the few industries where output actually kept growing throughout the crisis, up 2.6% in Q1 of 2015 and up 2.9% Q1 of 2016," notes Analytical Center expert Elena Razumova. Among the agricultural sectors directly affected by the embargo it was the pig and poultry farms that managed to achieve the most, generating growth of 16.2% and 14.4% respectively. At the same time, by 2016 Russia’s poultry production increased to a level that completely satisfied domestic demand, the expert stressed.
"In 2015 (we do not have more recent data yet), we saw an increase in the production of practically all vegetables: up 4.9% for cucumbers, up 7.9% for carrots, up 13% for mushrooms, while total output of zucchinis increased by more than 20%," Ms. Razumova said. Another important trend noted by the expert was a decline in the agricultural output by household that coincided with an increase in industrial agricultural output, specifically by independent farms and large agricultural businesses. In her opinion, the embargo has given added support to independent farms, especially those specializing in beef and dairy products.
In the food stuffs industry, output of practically all categories of food stuffs went up on the pre-embargo level, except for sausage (-8.5%) and juices (-38.5%). Sausage production fell as a result of falling consumer demand and rising costs (a number of important raw materials in this sector such packaging materials and spices must be imported), Ms. Razumova explained. As for juice production, here the decline in output may have been precipitated by a shortage of raw materials (Russia doesn’t yet have the requisite capacity), and an almost 20% fall in the imports of key fruits that has taken place since 2015, the expert believes.
Naturally, there are agricultural sectors that have managed to cash in on the situation while there are also those that have not been as successful in their import substitution efforts. First of all it was companies that were actively expanding their market share in the domestic market before the embargo, specifically poultry and pig farms as well as cheese and butter producers, that have managed to capitalize on the embargo the most. Effectively, they reaped the benefits of investments they made prior to 2010. By contrast, berry producers, for example, are lagging behind: the output of fruits and berries in 2015 fell by 3.1% on 2014 and the largest decline was recorded in apples and pears. The largest amount of problems with import substitution occur in sectors with long payback periods and high initial investments such as cattle breeding, gardening, nut and meat production. "We can’t exactly blame these sectors for not doing enough, demand for these products in Russia is very limited, 90% of the nuts that people buy would be too expensive to grow in Russia while the remaining 10% only bear the first fruit in 5-10 years after the gardens are planted," Ms. Razumova explained.
Nevertheless, the expert believes that Russian agricultural producers did get a number of competitive advantages as a result of the embargo. Apart from the fact that the market was effectively closed for a large number of importers, Russian producers got an edge in logistics because oftentimes switching from one foreign supplier to another involves a significant increase in transportation costs. The devaluation of the ruble also had a positive effect on domestic agricultural production. However, other major agricultural producers around the world such as Brazil, Argentine, Belarus also saw their national currencies lose value so this fact is going to cease to play a key role both within and outside Russia, Ms. Razumova warns. She also believes that the decline in investments in the agricultural industry that’s been happening for 2 years running now also presents a serious risk to the development of the sector.